Benefit-Corporations on the Rise

by Sophie Menin

An efficient market, matching capital-hungry companies that want to make a profit and address a social problem, with social-impact investors who want to have a feel-good return built into their financial returns, just took another step toward reality.

On April 18, Delaware introduced Senate Bill 47, a statue that recognizes the Public Benefit Corporation (PBC) as a new corporate form. Basically, a public benefit corporation is a for-profit corporation managed not only for the benefit of its stockholders, but also for the benefit of the public, society and environment at large.

Sounds airy-fairy, but as previously reported in Penta, benefit-corporations are in effect for-profit companies with non-profit goals, legal entities in which directors are specifically held accountable, through corporate bylaws, for their treatment of people and planet alongside their responsibilities to maximize shareholder returns. Andrew Kassoy, a former partner in Michael and Susan Dell’s private real estate vehicle, is one of the principle intellectual heavyweights behind the benefit-corporation movement.

Since 2010, benefit-corporation legislation has been enacted in 12 states, and is under consideration in twenty more. Each state’s legislation basically requires such companies have an overarching general public benefit obligation, are accountable to all stakeholders, and provide “impact transparency.” Bill 47 carries added significance, since fifty percent of public companies, two-thirds of Fortune 500 companies, and most venture-backed companies are incorporated in Delaware.

The new PBC legislation has the full support of the Delaware Bar, the Chancery Court and Governor Markell. It is expected to pass easily through the legislature, to be signed into law by the end of June, and be in force, it is hoped, by August 1st.

But the Delaware law was never a foregone conclusion. When B-Lab – Kassoy’s not-for-profit firm agitating to build the benefit-corporation community – began its conversation with the state two years ago, Governor Markell made it clear that, even though he was enthusiastic about what B-Lab was trying to accomplish, and could see that benefit-corporations were a growing national movement led by investors and entrepreneurs, any action taken in Delaware would be the result of dialogue with local lawyers about corporate governance. Meanwhile, the initial reaction of the legal community was, “Why would any investor want this?”

Apparently, the logjam was cleared last September when twelve attorneys from the Delaware Corporate Law Counseling Group, Secretary of State Jeffrey Bullock, Deputy Secretary of State Richard Geisenberger, and Chancellor of the Court of Chancery Leo Strine, Jr. finally sat down with a group of impact investors and benefit corporation founders. Across the table were the likes of Neil Blumenthal of Warby Parker (eye glasses), Nate Morris of Rubicon Global (waste management), and Ommeed Sathe of Prudential Financial (financial services).

“Every investor and entrepreneur at the meeting had a compelling story about wanting to make money and make a difference,” Deputy Secretary of State Geisenberger recalls. “Neil Blumenthal of Warby Parker spoke about donating a pair glasses for each pair they sold, Nate Morris of Rubicon Global discussed green waste management solutions. What they all wanted was the ability to enforce their business practices by writing them into the DNA of their companies. We came to the conclusion that if that’s what they want, who are we to deny it? The devil was in the details, figuring out how to structure the legislation in a way that there would be clarity in the courts. Lawyers on the Counseling Group spent thousands of non-billable hours trying to get it right.”

Delaware’s proposed legislation contains three significant changes to the movement’s boilerplate: companies in Delaware will go by the designation “public benefit-corporation,” instead of “benefit-corporation,” to be clear that the objective is to produce benefits to society as opposed to only “private” benefits. Furthermore, any change of a company’s charter to a benefit-corporation will require a 90% shareholder vote instead of two-thirds; this change links to Delaware’s statute which ensures that no shareholder is forced into a new set of fiduciary obligations without their consent. Finally, the public benefit-coprporation will only be required to report on their social impact to stockholders – they will not be held accountable to third-party standards.

Corporate officers should be reassured that they will be protected, through this Delaware law, from the more rabid and uncompromising elements in the do-good industry. Delaware is of course famous for being sensitive to corporate needs; state legislatures envisioned a scenario where companies might not want to issue a public impact report, particularly not in the early stages of their development. Kassoy calls the Delaware changes, “Good, if not best practices,” and plans to push the legislature to improve the bill over time, as it sees the benefits of impact transparency.

Either way, the new Delaware law could be a tipping point for the nascent benefit-corporation movement. Delaware leads on a lot of corporate law and legal precedents; having a PBC designation in the state should breed confidence among state legislatures elsewhere.

“Entrepreneurs and investors who are comfortable with Delaware will be more comfortable investing in a cutting edge entity like a PBC, because when uncharted waters lead to a dispute, there will be comfort in knowing they will be dealing with the Delaware legal system,” says Frederick Alexander, an attorney and member of Delaware’s Corporate Law Counseling Group.

About Penta

Written with Barron’s wit and often contrarian perspective, Penta provides the affluent with advice on how to navigate the world of wealth management, how to make savvy acquisitions ranging from vintage watches to second homes, and how to smartly manage family dynamics.

Richard C. Morais, Penta’s editor, was Forbes magazine’s longest serving foreign correspondent, has won multiple Business Journalist Of The Year Awards, and is the author of two novels: The Hundred-Foot Journey and Buddhaland, Brooklyn. Sonia Talati is Penta’s reporter about town, both online and for the magazine. She previously worked for the Wall Street Journal and various television station affiliates around the country. Sonia has a B.A. in economics from the University of California, Los Angeles, and an M.A. from Columbia University Graduate School of Journalism.